<PAGE> 1
ANNUAL REPORT
--------------------------------------------------------------------------------
<TABLE>
<C> <S>
[HOTCHKIS AND WILEY FUNDS] JUNE 30, 2000
725 SOUTH FIGUEROA STREET [LOGO]
SUITE 4000
LOS ANGELES, CALIFORNIA 90017-5400 HOTCHKIS AND WILEY FUNDS
800-236-4479
LOW DURATION FUND
INVESTMENT ADVISER --------------------------------------------------
MERCURY ADVISORS Seeks to maximize total return, consistent with
725 SOUTH FIGUEROA STREET preservation of capital. The Fund invests in
SUITE 4000 bonds of varying maturities with a portfolio
LOS ANGELES, CALIFORNIA 90017-5400 duration of one to three years.
LEGAL COUNSEL
GARDNER, CARTON & DOUGLAS
321 NORTH CLARK STREET
CHICAGO, ILLINOIS 60610
INDEPENDENT ACCOUNTANTS
PRICEWATERHOUSECOOPERS LLP
100 EAST WISCONSIN AVENUE
MILWAUKEE, WISCONSIN 53202
DISTRIBUTOR
FAM DISTRIBUTORS, INC.
P.O. BOX 9081
PRINCETON, NEW JERSEY 08543-9081
TRANSFER AGENT
FINANCIAL DATA SERVICES, INC.
P.O. BOX 41621
JACKSONVILLE, FLORIDA 33232-1621
CUSTODIAN
BROWN BROTHERS HARRIMAN & CO.
40 WATER STREET
BOSTON, MASSACHUSETTS 02109-3661
</TABLE>
<TABLE>
<S> <C>
THIS MATERIAL MUST BE PRECEDED MERCURY ADVISORS: INVESTMENT ADVISER
OR ACCOMPANIED BY A PROSPECTUS.
</TABLE>
<PAGE> 2
[HOTCHKIS AND WILEY FUNDS LOGO]
DEAR SHAREHOLDER:
We are pleased to present to you the annual report of the Hotchkis and Wiley Low
Duration Fund for the fiscal year ended June 30, 2000.
A booming economy is fundamentally bad for the bond market as it signals
potential future inflationary pressures resulting from an excess of demand
relative to supply. The past twelve months were no exception. The economy grew
at an estimated 6.0% rate during the last twelve months. Consumer spending, the
result of full employment and a booming equity market, has been the key driver
of this torrid growth. Investment spending has also been a vital component of
growth as corporations have invested in productivity-enhancing technology in
order to remain competitive. These productivity enhancements have kept inflation
contained, particularly relative to such strong economic growth, but recently
signs of increasing inflation began to emerge.
Meanwhile, technical changes in the market became increasingly important. In
spite of a steaming economy, longer-maturity U.S. Treasuries actually rallied as
the Treasury Department began to reduce the supply of outstanding debt by
purchasing and retiring billion of dollars of bonds. The Treasury buybacks were
a result of record federal surpluses and are expected to continue for several
years. The increased current demand and anticipation of reduced future supply
caused 30-year Treasury yields to fall by 7 basis points during the past year.
In the meantime, the Federal Reserve Bank continued to slow the economy by
increasing short-term rates. The Fed raised the Federal Funds Rate by 150 basis
points in five separate moves over the past twelve months. In sympathy,
short-term Treasury rates rose between 83 and 118 basis points.
With short-term rates rising and long-term rates falling, the yield curve
continued to invert. In fact, at the end of the period, three-month Treasury
yields, at 5.86%, were only 4 basis points lower than 30 year Treasury yields.
At the beginning of the period this difference was a more normal 121 basis
points.
Non-Treasury sectors of the bond market did not perform nearly as well as
Treasuries, particularly longer-maturity issues. Corporate securities suffered
as the Fed raised rates and investors fled to higher quality positions. In
general, lower quality and longer maturity corporate bonds fared the worst. Many
below-investment-grade bonds posted negative total returns for the twelve-month
period as the negative price effects of spread widening more than offset their
initial yield advantage. Floating-rate debt, the coupon payments of which adjust
upwards as rates rise, outperformed fixed-rate issues. Adjusted for duration
differences, mortgage- and asset-backed securities performed in-line with the
overall market. However, in both cases, longer-maturity issues underperformed
shorter-maturity issues. Non-U.S. bonds posted fairly weak returns as global
growth remained strong. However, emerging market issues were extremely strong,
bouncing back as those economies regained some momentum.
The Fund was positioned for rising interest rates, and this duration decision
added to relative returns. In terms of yield curve strategy, or maturity
structure, the Fund's overweight of longer-maturity issues contributed to the
outperformance of the Fund compared to the Merrill Lynch 1-3 Year U.S. Treasury
Note Index. Sector strategies, on balance, detracted from relative returns. In
general, holdings of non-Treasury issues for additional yield had a negative
impact. Specifically, overweighting corporates with limited use of
below-investment-grade issues
<PAGE> 3
detracted from performance. A neutral to slight underweighting of
mortgage-backed securities did not significantly impact the portfolio. A
larger-than-index allocation to asset-backed securities improved performance.
Finally, security selection added to returns primarily through large positions
in floating-rate securities and Treasury Inflation Protected Securities.
We appreciate your continued support and look forward to serving your investment
needs in the months and years ahead.
Sincerely,
/s/ Nancy D. Celick
Nancy D. Celick
President
HOTCHKIS AND WILEY FUNDS
The opinions expressed in the Shareholder letter are as of June 30, 2000. They
are subject to change and any forecasts made cannot be guaranteed. The Fund may
not continue to hold any securities mentioned and has no obligation to disclose
purchases or sales in these securities.
2
<PAGE> 4
LOW DURATION FUND - INVESTOR CLASS
MAY 18, 1993 - JUNE 30, 2000
[LOW DURATION FUND LINE GRAPH]
<TABLE>
<CAPTION>
MERRILL LYNCH 1-3 YR U.S. TREASURY
LOW DURATION FUND INDEX
----------------- ----------------------------------
<S> <C> <C>
10000 10000
Jun-93 10053 10058
10580 10202
10713 10262
10873 10211
Jun-94 10962 10219
11149 10320
11274 10320
11617 10667
Jun-95 12084 11010
12330 11175
12711 11456
12818 11494
Jun-96 12989 11610
13239 11802
13503 12026
13627 12105
Jun-97 14000 12372
14272 12614
14528 12826
14737 13015
Jun-98 15003 13214
15362 13620
15348 13724
15420 13806
Jun-99 15479 13885
15689 14060
15839 14144
16014 14321
Jun-00 16315 14567
</TABLE>
<TABLE>
<CAPTION>
Ended 6/30/00
-------------
Investor Class Fund ML 1-3
<S> <C> <C>
-----------------------------------------------------------------------
One Year 5.40% 4.91%
-----------------------------------------------------------------------
Five Years 6.19% 5.76%
-----------------------------------------------------------------------
Since Inception (5/18/93) 7.11% 5.42%
-----------------------------------------------------------------------
Distributor Class
-----------------------------------------------------------------------
Since Inception (9/24/99) 3.83% 3.73%
-----------------------------------------------------------------------
</TABLE>
HOW A $10,000 INVESTMENT HAS GROWN:
The chart above shows the growth of a $10,000 investment in the Fund as
compared to the performance of the Merrill Lynch 1-3 Year U.S. Treasury Note
Index. The table below the chart shows the average annual total returns of an
investment over various periods.
Total returns and average annual total returns for the Fund are net of all
charges and fees and assume reinvestment of capital gains distributions and
shareholder dividends at net asset value. The investment adviser pays annual
operating expenses in excess of 0.58% and 0.83% of the average net assets of the
Investor Class and Distributor Class, respectively. Were the investment adviser
not to pay such expenses, net returns would be lower. Investment returns and
principal will vary so that shares, when redeemed, may be worth more or less
than their original cost. Past performance is no guarantee of future results.
The Distributor Class pays an annual 0.25% 12b-1 fee.
The Fund may invest a portion of its assets in non-investment grade debt
securities, commonly referred to as high yield or "junk" bonds, which may be
subject to greater market fluctuations and risk of loss of income and principal
than securities in higher rating categories. The Fund may also invest a portion
of its assets in emerging market and other foreign securities, which involve
special risks including fluctuating foreign exchange rates, foreign government
regulations, differing degrees of liquidity, and the possibility of substantial
volatility due to adverse political, economic or other developments.
The Merrill Lynch 1-3 Year U.S. Treasury Note Index is an unmanaged index of
Treasury securities with maturities of one to three years, which securities are
guaranteed as to the timely payment of principal and interest by the U.S.
government. The Fund owns securities not reflected in this Index or guaranteed.
The Index does not reflect payment of transaction costs, fees and expenses
associated with an investment in the Fund. It is not possible to invest directly
in an index.
3
<PAGE> 5
SCHEDULE OF INVESTMENTS -- JUNE 30, 2000
--------------------------------------------------------------------------------
LOW DURATION FUND
<TABLE>
<CAPTION>
CORPORATE BONDS Principal
AND NOTES -- 39.5% Amount Value
------------------------------------------------------------
<S> <C> <C>
AEROSPACE/DEFENSE -- 0.6%
............................................................
Raytheon Company, (Acquired
3/02/2000, cost $2,000,000),
7.4700%, 3/01/2000 # r $ 2,000,000 $ 1,998,784
------------------------------------------------------------
BANKS -- 3.0%
............................................................
Korea Development Bank,
(Acquired 9/23/1999, cost
$747,570), 7.6250%,
10/01/2002 r 750,000 744,806
............................................................
Sovereign Bancorp:
(Acquired 6/10/1999, cost
$647,733) 6.6250%, 3/15/2001
r 1,700,000 1,670,495
............................................................
10.2000%, 6/30/2005 5,350,000 5,408,636
............................................................
Wells Fargo Bank, N.A., CLB
8/01/2000, 6.8913%,
5/02/2005 # 3,000,000 2,995,644
..................... ...................... ---------
10,819,581
------------------------------------------------------------
CABLE TELEVISION -- 2.3%
............................................................
Cox Enterprises, Inc.,
(Acquired 5/01/2000 and
5/10/2000, cost $8,400,002),
7.5525%, 5/01/2003 # r 8,400,000 8,384,687
------------------------------------------------------------
ELECTRONIC COMPONENTS -- 0.4%
............................................................
Pioneer-Standard Electronics,
Inc., 8.5000%, 8/01/2006 1,500,000 1,444,373
------------------------------------------------------------
ELECTRIC: INTEGRATED -- 2.3%
............................................................
Empresa Nacional de
Electricidad SA
(Endesa-Chile), 8.5000%,
4/01/2009 1,200,000 1,171,207
............................................................
SCANA Corporation, (Acquired
1/31/2000, cost $7,300,000),
CLB 8/08/2000, 7.1525%,
2/08/2002 # r 7,300,000 7,299,234
..................... ...................... ---------
8,470,441
------------------------------------------------------------
EUROBANKS -- 10.0%
............................................................
Credit Industriel et
Commercial (CIC), 7.4750%,
6/29/2049 # 7,250,000 6,945,137
............................................................
ForeningsSparbanken AB
(Swedbank), CLB 12/15/2000,
7.9410%, 12/15/2049 # 9,250,000 9,250,897
............................................................
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
------------------------------------------------------------
<S> <C> <C>
Nordbanken, CLB 10/25/2001,
6.9338%, 10/29/2049 # $ 6,680,000 $ 6,653,614
............................................................
Okobank, CLB 10/25/2001,
7.2975%, 9/29/2049 # 5,620,000 5,610,581
............................................................
Robert Fleming Capital Ltd.,
CLB 5/07/2001, 7.3450%,
5/07/2006 # 4,000,000 3,981,048
............................................................
Skandinavinska Enskilda
Banken, CLB 6/28/2003,
7.2550%, 6/29/2049 # 3,700,000 3,650,124
..................... ...................... ---------
36,091,401
------------------------------------------------------------
FINANCIAL SERVICES -- 12.5%
............................................................
Associates Corp. N.A.,
6.9025%, 5/08/2003 # 4,000,000 3,999,124
............................................................
AT & T Capital Corp., 6.7800%,
10/24/2000 # 2,750,000 2,752,040
............................................................
Countrywide Home Loan:
6.5810%, 1/21/2003 # 3,250,000 3,236,304
............................................................
7.3275%, 3/16/2005 # 3,550,000 3,504,141
............................................................
Ford Motor Credit Company,
7.8750%, 6/15/2010 2,350,000 2,350,752
............................................................
Fuji Finance Grand Cayman:
7.3000%, 3/29/2049 # 6,600,000 6,410,633
............................................................
CLB 8/08/2002, 7.1137%,
8/29/2049 # 2,400,000 2,331,247
............................................................
Golden State Holdings, CLB
8/01/2000, 7.3913%,
8/01/2003 # 9,900,000 9,428,790
............................................................
Lehman Brothers Holdings,
7.2900%, 6/01/2001 # 800,000 800,499
............................................................
Pemex Finance Ltd., 5.7200%,
11/15/2003 5,027,750 4,890,719
............................................................
Textron Financial Corp.,
6.5810%, 9/17/2002 # 5,500,000 5,502,150
..................... ...................... ---------
45,206,399
------------------------------------------------------------
OIL: INTEGRATED -- 2.6%
............................................................
Ashland, Inc., CLB 3/07/2001,
7.3925%, 3/07/2003 # 1,800,000 1,793,936
............................................................
LG-Caltex Oil Corp., 7.5950%,
10/29/2001 # 4,500,000 4,494,100
............................................................
</TABLE>
See Notes to the Financial Statements
4
<PAGE> 6
SCHEDULE OF INVESTMENTS -- JUNE 30, 2000
--------------------------------------------------------------------------------
LOW DURATION FUND
<TABLE>
<CAPTION>
Principal
Amount Value
------------------------------------------------------------
<S> <C> <C>
YPF Sociedad Anonima, 8.0000%,
2/15/2004 $ 3,325,000 $ 3,233,563
..................... ...................... ---------
9,521,599
------------------------------------------------------------
RETAIL -- 1.7%
............................................................
Great Atlantic & Pacific Tea,
7.7000%, 1/15/2004 6,433,000 6,141,354
------------------------------------------------------------
TELECOMMUNICATIONS -- 2.6%
............................................................
Sprint Capital Corp., 7.6250%,
6/10/2002 3,300,000 3,313,721
............................................................
Sprint Spectrum L.P., CLB
8/15/2001, 11.0000%,
8/15/2006 3,040,000 3,273,195
............................................................
Telefonica de Argentina S.A.,
11.8750%, 11/01/2004 2,600,000 2,723,500
..................... ...................... ---------
9,310,416
------------------------------------------------------------
TRUCKING & LEASING -- 1.0%
............................................................
Amerco, Inc., 8.8000%,
2/04/2005 3,650,000 3,495,963
------------------------------------------------------------
TRANSPORTATION -- 0.5%
............................................................
Bombardier Capital, Inc.,
(Acquired 1/22/1999, cost
$1,721,447), 6.0000%,
1/15/2002 r 1,725,000 1,684,702
------------------------------------------------------------
Total corporate bonds and
notes (cost $142,870,435) 142,569,700
------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
GOVERNMENT AGENCY
MORTGAGE-BACKED
SECURITIES -- 12.3%
------------------------------------------------------------
<S> <C> <C>
COLLATERALIZED MORTGAGE OBLIGATIONS -- 1.6%
............................................................
Federal Home Loan Mortgage Corporation:
1564 SB, 7.2799%, 8/15/2008
# 512,496 507,502
............................................................
1336 H, CLB, 7.7500%,
1/15/2021 72,831 73,058
............................................................
1617 D, 6.5000%, 11/15/2023 71,000 65,569
............................................................
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
------------------------------------------------------------
<S> <C> <C>
2118 Z, CLB, 6.5000%,
12/15/2028 $ 340,963 $ 257,438
............................................................
Federal National Mortgage Association:
1991-153 N, 7.5000%,
2/25/2007 102,655 102,524
............................................................
1993-6 S, 6.2825%, 1/25/2008
# 869,827 822,701
............................................................
1993-175 SD, 7.7393%,
9/25/2008 # 2,014,500 1,927,750
............................................................
1988-26 C, 7.5000%,
7/25/2018 9,301 9,267
............................................................
1991-147K, 7.0000%,
1/25/2021 173 173
............................................................
1992-138 O, 7.5000%,
7/25/2022 1,828 1,821
............................................................
1993-45 SB, 8.6440%,
4/25/2023 # 406,833 350,563
............................................................
1997-59 SU, 7.4143%,
9/25/2023 # 706,053 676,271
............................................................
1994-60 D, 7.0000%,
4/25/2024 30,000 28,352
............................................................
1997-76 FT, 7.0562%,
9/17/2027 # 806,098 769,822
............................................................
Pool #514230, 6.2810%,
9/01/2029 18,335 17,645
..................... ...................... ---------
5,610,456
------------------------------------------------------------
PASS-THROUGH SECURITIES -- 10.5%
............................................................
Federal Home Loan Mortgage
Corporation, 8.5000%,
8/15/2030 /\ 22,500,000 22,921,807
............................................................
Government National Mortgage
Association, 8.0000%,
8/15/2030 /\ 15,000,000 15,140,580
..................... ...................... ---------
38,062,387
------------------------------------------------------------
</TABLE>
See Notes to the Financial Statements
5
<PAGE> 7
SCHEDULE OF INVESTMENTS -- JUNE 30, 2000
--------------------------------------------------------------------------------
LOW DURATION FUND
<TABLE>
<CAPTION>
Principal
Amount Value
------------------------------------------------------------
<S> <C> <C>
STRIPPED MORTGAGE-BACKED SECURITIES -- 0.2%
............................................................
Federal National Mortgage
Association:
1993-72 J (IO), 6.5000%,
12/25/2006 $ 127,869 $ 5,997
............................................................
1993-97 L (IO), 7.5000%,
5/25/2023 62,170 256
............................................................
1994-53 E (PO), 0.0000%,
11/25/2023 517,217 435,676
............................................................
1998-48 CI (IO), 6.5000%,
8/25/2028 556,104 97,963
..................... ...................... ---------
539,892
------------------------------------------------------------
Total government agency mortgage-backed
securities
(cost $44,311,480) 44,212,735
------------------------------------------------------------
<CAPTION>
NON-AGENCY MORTGAGE-BACKED
SECURITIES -- 34.9%
------------------------------------------------------------
<S> <C> <C>
ASSET-BACKED SECURITIES -- 24.1%
............................................................
ACC Automobile Receivables
Trust, (Acquired 6/24/1999,
cost $1,391,920), CLB,
1997-C A, 6.4000%, 3/17/2004
r 1,388,882 1,380,945
............................................................
Asset Backed Funding
Certificates, CLB, 1999-1
A2F, 7.6410%, 10/25/2030 3,969,611 3,930,530
............................................................
BankBoston Home Equity Loan
Trust, CLB, 1998-1 A1,
6.4600%, 4/25/2012 177,094 176,365
............................................................
Champion Auto Grantor Trust,
(Acquired 3/18/1998, cost
$236,633), CLB, 1998-A A,
6.1100%, 10/15/2002 r 236,637 233,850
............................................................
CIT Marine Trust, CLB, 1999-A
A2, 5.8000%, 4/15/2010 4,200,000 4,045,083
............................................................
Cityscape Home Equity Loan
Trust, (Acquired 9/09/1998,
cost $2,468,481), CLB,
1996-4 A10, 7.4000%,
9/25/2027 r 2,432,001 2,357,521
............................................................
COMM, 2000 - FLA2 A, (Acquired
6/28/2000, cost $4,750,000)
CLB, 6.7370%, 1/15/2003 # r 4,750,000 4,751,857
............................................................
</TABLE>
<TABLE>
------------------------------------------------------------
<CAPTION>
Principal
Amount Value
------------------------------------------------------------
<S> <C> <C>
Commercial Financial Services
Securitized Multiple Asset
Rated Trust, (Acquired
9/24/1997, cost $2,256,088),
1997-5 A1, 7.7200%,
6/15/2005 r + $ 2,256,088 $ 676,827
............................................................
Commercial Mortgage Acceptance
Corporation, (Acquired
3/13/1998, cost $1,265,052),
CLB, 1996-C2 A2, 7.0328%,
9/15/2023 # r 1,123,473 1,112,435
............................................................
Countrywide Asset-Backed
Certificates, CLB, 2000-1
AV1, 7.2513%, 3/25/2031 # 2,977,103 2,978,964
............................................................
Countrywide Home Equity Loan
Trust, CLB, 1999-A CTFS,
6.7525%, 4/15/2025 # 1,011,849 1,014,616
............................................................
CPS Auto Trust, CLB, 1998-1 A,
6.0000%, 8/15/2003 725,138 715,359
............................................................
Credit-Based Asset Servicing
and Securities, CLB,
2000-CB2 A1A, 7.0613%,
9/25/2029 # 4,572,408 4,586,879
............................................................
C.S. First Boston Mortgage
Securities Corp., (Acquired
8/14/1997, cost $897,895),
CLB, 1995-WF1 AX, 1.3350%,
12/21/2027 # r 14,255,347 465,651
............................................................
Firstplus Home Loan Trust,
CLB, 1998-4 A4, 6.3200%,
3/10/2017 5,000,000 4,921,725
............................................................
First Tennessee Auto Grantor
Trust, (Acquired 4/17/1998,
cost $491,224), CLB, 1998-A
A, 6.1340%, 4/15/2003 r 491,224 491,263
............................................................
First Union-Lehman Brothers
Commercial Mortgage Trust,
CLB, 1997-C1 A1, 7.1500%,
2/18/2004 4,497,360 4,483,342
............................................................
GMAC Mortgage Corporation Loan
Trust, CLB, 2000-HLTV A1,
6.8513%, 11/18/2015 # 4,146,856 4,146,130
............................................................
GREAT, (Acquired 7/02/1998,
cost $2,695,527), 1998-1 A1,
7.3300%, 9/15/2007 r + 2,695,527 808,658
............................................................
</TABLE>
See Notes to the Financial Statements
6
<PAGE> 8
SCHEDULE OF INVESTMENTS -- JUNE 30, 2000
--------------------------------------------------------------------------------
LOW DURATION FUND
<TABLE>
<CAPTION>
Principal
Amount Value
------------------------------------------------------------
<S> <C> <C>
Green Tree Recreational,
Equipment & Consumer Trust:
CLB, 1996-C A1, 6.8913%,
10/15/2017 $ 3,907,381 $ 3,907,048
............................................................
CLB, 1996-B CTFS, 7.7000%,
7/15/2018 2,250,000 2,154,589
............................................................
Heilig-Meyers Master Trust,
(Acquired 2/20/1998, cost
$4,099,626), CLB, 1998-1A A,
6.1250%, 1/20/2007 r 4,100,000 3,987,475
............................................................
Nationslink Funding
Corporation:
CLB, 1999-SL A2, 6.9850%,
12/10/2001 2,050,000 2,011,737
............................................................
CLB, 1999-SL A1V, 6.9850%,
4/10/2007 2,141,964 2,142,724
............................................................
CLB, 1999-2 A1C, 7.0300%,
1/20/2008 580,402 572,337
............................................................
Nomura Asset Securities
Corporation:
CLB, 1995-MD3 A1A, 8.1700%,
3/04/2020 1,794,204 1,814,456
............................................................
CLB, 1995-MD3 A1B, 8.1500%,
3/04/2020 2,750,000 2,832,258
............................................................
Nomura Depositor Trust,
(Acquired 6/28/1999, cost
$12,405,588),
CLB, 1998-ST1 A3, 7.2312%,
1/15/2003 # r 12,738,992 12,570,302
............................................................
Resolution Trust Corporation:
CLB, 1994-C2 G, 8.0000%,
4/25/2025 3,563,762 3,402,841
............................................................
CLB, 1994-C1 E, 8.0000%,
6/25/2026 6,632,991 6,508,788
............................................................
CLB, 1994-C1 F, 8.0000%,
6/25/2026 1,826,520 1,739,131
..................... ...................... ---------
86,921,686
------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
------------------------------------------------------------
<S> <C> <C>
COLLATERALIZED MORTGAGE OBLIGATIONS -- 9.1%
............................................................
Bank of America Mortgage
Securities, CLB, 2000-2 A2,
7.5000%, 4/25/2030 $ 5,725,293 $ 5,693,832
............................................................
Blackrock Capital Finance
L.P., (Acquired 6/23/1997,
cost $698,539), CLB, 1997-R2
AP, 9.4735%, 12/25/2035 # r 702,822 709,851
............................................................
Citicorp Mortgage Securities,
Inc.:
CLB, 1994-4 A6, 6.0000%,
2/25/2009 4,047,944 3,923,166
............................................................
CLB, 1997-3 A2, 6.9200%,
8/25/2027 73,243 72,953
............................................................
Countrywide Funding
Corporation, CLB, 1994-17
A9, 8.0000%, 7/25/2024 4,000 3,991
............................................................
Housing Securities, Inc., CLB,
1994-2 B1, 6.5000%,
7/25/2009 187,847 145,992
............................................................
Independent National Mortgage
Corporation, CLB, 1995-A A4,
8.7500%, 3/25/2025 2,378 2,371
............................................................
Medallion Trust, CLB, 2000-1G
A1, 6.500%, 7/12/2031 # 4,675,000 4,676,828
............................................................
Ocwen Residential MBS Corp.,
(Acquired 6/18/1998, cost
$2,493,746), CLB, 1998-R2
AP, 6.5671%, 11/25/2034 # r 2,496,868 2,372,024
............................................................
PNC Mortgage Securities Corp.,
CLB, 1997-3 1A5, 7.0000%,
5/25/2027 4,820,291 4,773,847
............................................................
Prudential Home Mortgage
Securities, Co., CLB,
1993-36 A10, 7.2500%,
10/25/2023 281,776 280,284
............................................................
Residential Funding Mortgage
Securities, Inc.:
CLB, 1993-S9 A8, 5.9792%,
2/25/2008 # 46,510 41,515
............................................................
CLB, 1998-S17 A6, 6.7500%,
8/25/2028 699,566 696,674
............................................................
</TABLE>
See Notes to the Financial Statements
7
<PAGE> 9
SCHEDULE OF INVESTMENTS -- JUNE 30, 2000
--------------------------------------------------------------------------------
LOW DURATION FUND
<TABLE>
<CAPTION>
Principal
Amount Value
------------------------------------------------------------
<S> <C> <C>
Salomon Brothers Mortgage
Securities VII:
CLB, 1994-6 A1, 6.9481%,
5/25/2024 # $ 305,877 $ 304,686
............................................................
CLB, 1998-NC3 A2, 6.4100%,
8/25/2028 1,075,000 1,068,502
............................................................
Structured Mortgage Asset
Residential Trust:
CLB, 1992-3A AA, 8.0000%,
10/25/2007 85,814 86,567
............................................................
CLB, 1991-1 H, 8.2500%,
6/25/2022 55,289 55,742
............................................................
CLB, 1993-5 AA, 9.7200%,
6/25/2024 # 35,352 33,476
............................................................
Walsh Acceptance, (Acquired
3/06/1997, cost $703,402),
CLB, 1997-2 A, 7.6513%,
3/01/2027 # r 697,949 566,144
............................................................
Washington Mutual:
CLB, 2000-1 A1, 6.9413%,
6/25/2024 # 5,288,625 5,281,406
............................................................
(Acquired 4/06/2000, cost
$1,900,000), CLB, 2000-1 B1,
10.6513%, 1/25/2040 # r 1,900,000 1,900,000
..................... ...................... ---------
32,689,851
------------------------------------------------------------
PASS-THROUGH
SECURITIES -- 0.1%
............................................................
Citicorp Mortgage Securities,
Inc., CLB, 1989-8 A1,
10.5000%, 6/25/2019 230,305 243,005
------------------------------------------------------------
STRIPPED MORTGAGE-BACKED SECURITIES -- 1.6%
............................................................
Asset Securitization
Corporation,
1997-D5 ACS1 (IO), 1.8371%,
2/14/2041 # 58,446,295 1,920,837
............................................................
Chase Commercial Mortgage
Securities Corporation, CLB,
1997-1 X (IO), 1.4412%,
4/19/2015 # 23,498,472 1,532,218
............................................................
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
------------------------------------------------------------
<S> <C> <C>
Saxon Asset Securities Trust,
CLB, 2000-2 AIO, 6.0000%,
7/25/2030 $27,000,000 $ 2,425,788
..................... ...................... ---------
5,878,843
------------------------------------------------------------
Total non-agency mortgage-
backed securities
(cost $131,005,676) 125,733,385
------------------------------------------------------------
<CAPTION>
PREFERRED
STOCK -- 0.3% Shares
------------------------------------------------------------
<S> <C> <C>
Home Ownership Funding 2,
(Acquired 2/20/1997, cost
$1,500,000) r 1,500 1,128,000
------------------------------------------------------------
<CAPTION>
U.S. TREASURY Principal
OBLIGATIONS -- 13.1% Amount
------------------------------------------------------------
<S> <C> <C>
U.S. TREASURY NOTES:
6.6250%, 5/31/2002 $ 6,500,000 6,526,409
............................................................
5.7500%, 4/30/2003 1,500,000 1,477,500
............................................................
U.S. Treasury Inflation Index,
3.6250%, 7/15/2002 /\/\ 39,550,780 39,303,588
------------------------------------------------------------
Total U.S. Treasury
obligations (cost
$47,105,471) 47,307,497
------------------------------------------------------------
SHORT-TERM
INVESTMENTS -- 10.8%
------------------------------------------------------------
COMMERCIAL PAPER -- 10.7%
............................................................
Air Products and Chemicals,
Inc., 6.8000%, 7/13/2000
4(2) 6,250,000 6,235,833
............................................................
Edison Mission Midwest,
6.8000%, 7/13/2000 4(2) 3,300,000 3,292,520
............................................................
Enron Corp., 7.1700%,
7/06/2000 4(2) 18,000,000 17,982,075
............................................................
Fort James Corporation,
7.2500%, 7/05/2000 4(2) 11,000,000 10,991,139
..................... ...................... ---------
38,501,567
------------------------------------------------------------
</TABLE>
See Notes to the Financial Statements
8
<PAGE> 10
SCHEDULE OF INVESTMENTS -- JUNE 30, 2000
--------------------------------------------------------------------------------
LOW DURATION FUND
<TABLE>
<CAPTION>
Principal
Amount Value
------------------------------------------------------------
<S> <C> <C>
CERTIFICATES OF DEPOSIT -- 0.1%
............................................................
Brown Brothers Call Deposit,
5.5000% $ 490,000 $ 490,000
------------------------------------------------------------
Total short-term investments
(cost $38,991,567) 38,991,567
------------------------------------------------------------
Total investments -- 110.9%
(cost $405,784,629) 399,942,884
............................................................
Liabilities in excess of other
assets -- (10.9)% (39,152,522)
..................... ...................... ---------
Total net assets -- 100.0% $360,790,362
------------------------------------------------------------
</TABLE>
# -- Variable rate security. The rate listed is as of June 30, 2000.
IO -- Interest Only.
PO -- Principal Only.
CLB -- Callable.
r -- Restricted Security. Purchased in a private placement transaction; resale
to the public may require registration or may extend only to qualified
institutional buyers.
4(2) -- Restricted Security requiring resale to institutional investors.
+ -- Security Fair Valued under procedures established by the Board of Trustees
(See Note 1). Issuer in bankruptcy.
/\ -- When-issued security.
/\/\ -- Security marked as segregated to cover when-issued security.
See Notes to the Financial Statements
9
<PAGE> 11
STATEMENT OF ASSETS AND LIABILITIES
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LOW DURATION FUND June 30, 2000
---------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments, at value*.................................... $399,942,884
Cash...................................................... 60,648
Dividends and interest receivable......................... 3,461,696
Receivable for investments sold........................... 48,521,574
Receivable for fund shares sold........................... 1,807,371
Prepaid expenses.......................................... 24,397
------------
Total assets.......................................... 453,818,570
------------
LIABILITIES:
Payable to Adviser........................................ 71,273
Payable for investments purchased......................... 83,249,269
Payable for Fund shares repurchased....................... 9,303,177
Dividends payable......................................... 173,302
Accrued expenses and other liabilities.................... 280,282
------------
Total liabilities..................................... 93,077,303
------------
Net assets............................................ $360,741,267
============
NET ASSETS CONSIST OF:
Paid in capital........................................... $375,754,773
Undistributed net investment income....................... 521,560
Undistributed net realized loss on securities............. (9,693,321)
Net unrealized depreciation of securities................. (5,841,745)
------------
Net assets............................................ $360,741,267
============
CALCULATION OF NET ASSET VALUE PER SHARE -- INVESTOR CLASS:
Net assets................................................ $344,734,499
Shares outstanding (unlimited shares of no par value
authorized)............................................. 35,233,091
Net asset value per share (offering and redemption
price).................................................. $ 9.78
============
CALCULATION OF NET ASSET VALUE PER SHARE -- DISTRIBUTOR
CLASS:
Net assets................................................ $ 16,006,768
Shares outstanding (unlimited shares of no par value
authorized)............................................. 1,635,721
Net asset value per share (offering and redemption
price).................................................. $ 9.79
============
*Cost of Investments........................................ $405,784,629
============
</TABLE>
See Notes to the Financial Statements
10
<PAGE> 12
STATEMENT OF OPERATIONS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
LOW DURATION FUND June 30, 2000
---------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Income
Dividends............................................... $ 215,070
Interest................................................ 27,162,656
-----------
Total income........................................ 27,377,726
-----------
Expenses
Advisory fee............................................ 1,798,824
Legal and auditing fees................................. 56,053
Custodian fees and expenses............................. 82,137
Accounting and transfer agent fees and expenses......... 527,752
Administration fee...................................... 138,007
Trustees' fees and expenses............................. 37,240
Reports to shareholders................................. 87,624
Registration fees....................................... 48,889
Distribution fees -- Distributor Class.................. 19,883
Other expenses.......................................... 15,690
-----------
Total expenses...................................... 2,812,099
Less, expense reimbursement............................. (524,134)
-----------
Net expenses........................................ 2,287,965
-----------
Net investment income................................... 25,089,761
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on securities and foreign currency.... (7,573,804)
Net change in unrealized depreciation of securities..... 2,655,387
-----------
Net loss on investments................................... (4,918,417)
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $20,171,344
===========
</TABLE>
11
<PAGE> 13
STATEMENT OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
LOW DURATION FUND June 30, 2000 June 30, 1999
-------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Net investment income................................... $ 25,089,761 $ 21,127,218
Net realized loss on securities and foreign currency.... (7,573,804) (737,715)
Net change in unrealized depreciation of securities..... 2,655,387 (9,809,554)
------------- -------------
Net increase in net assets resulting from
operations.......................................... 20,171,344 10,579,949
------------- -------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- INVESTOR
CLASS:
Net investment income................................... (24,709,371) (21,925,763)
Net realized gain on securities transactions............ -- (642,509)
------------- -------------
Total dividends and distributions................... (24,709,371) (22,568,272)
------------- -------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- DISTRIBUTOR
CLASS:
Net investment income................................... (553,884) --
------------- -------------
FUND SHARE TRANSACTIONS -- INVESTOR CLASS:
Net proceeds from shares sold........................... 404,536,259 535,272,077
Shares issued in connection with payment of dividends
and distributions...................................... 23,252,688 22,210,113
Cost of shares redeemed................................. (488,042,330) (388,657,005)
------------- -------------
Net increase (decrease) in net assets resulting from
Fund share transactions............................. (60,253,383) 168,825,185
------------- -------------
FUND SHARE TRANSACTIONS -- DISTRIBUTOR CLASS:
Net proceeds from shares sold........................... 23,192,756 10
Shares issued in connection with payment of dividends
and distributions...................................... -- --
Cost of shares redeemed................................. (7,093,602) --
------------- -------------
Net increase in net assets resulting from Fund share
transactions........................................ 16,099,154 10
------------- -------------
Total increase (decrease) in net assets..................... (49,246,140) 156,836,872
NET ASSETS:
Beginning of year....................................... 409,987,407 253,150,535
------------- -------------
End of year*............................................ $ 360,741,267 $ 409,987,407
============= =============
*Including undistributed net investment income of:.......... $ 521,560 $ 596,912
============= =============
CHANGES IN SHARES OUTSTANDING -- INVESTOR CLASS:
Shares sold............................................. 41,162,121 52,973,511
Shares issued in connection with payment of dividends
and distributions...................................... 2,371,198 2,201,641
Shares redeemed......................................... (49,663,829) (38,637,818)
------------- -------------
Net increase (decrease)............................. (6,130,510) 16,537,334
============= =============
CHANGES IN SHARES OUTSTANDING -- DISTRIBUTOR CLASS:
Shares sold............................................. 2,358,838 1
Shares issued in connection with payment of dividends
and distributions...................................... -- --
Shares redeemed......................................... (723,118) --
------------- -------------
Net increase........................................ 1,635,720 1
============= =============
</TABLE>
12
<PAGE> 14
NOTES TO THE FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
JUNE 30, 2000
NOTE 1.
ACCOUNTING POLICIES: Hotchkis and Wiley Funds (the "Trust") is registered under
the Investment Company Act of 1940 as a diversified, open-end, management
investment company. The Trust was organized as a Massachusetts business trust on
August 22, 1984 and consists of ten series of shares comprising the Balanced
Fund, the Small Cap Fund, the Equity Income Fund, the International Fund, the
Total Return Bond Fund, the Low Duration Fund, the Short-Term Investment Fund,
the Mid-Cap Fund, the Global Equity Fund and the Equity Fund for Insurance
Companies (collectively, the "Funds"), the assets of which are invested in
separate, independently managed portfolios. The accompanying financial
statements include financial information for the Low Duration Fund (the "Fund");
financial statements for the other Funds are reported on separately. Investment
operations of the Fund began on May 18, 1993. The Fund seeks to maximize total
return, consistent with preservation of capital.
Effective April 1, 1999, the Fund issued two classes of shares: Investor Class
and Distributor Class. Distributor Class shares are subject to an annual Rule
12b-1 fee of 0.25% of average net assets. Investor Class shares do not pay a
12b-1 fee. Each class of shares for the Fund has identical rights and privileges
except with respect to Rule 12b-1 fees paid by the Distributor Class, voting
rights on matters pertaining to a single class of shares and the exchange
privileges of each class of shares. Sales of Distributor Class shares commenced
September 24, 1999. The following is a summary of significant accounting
policies followed by the Fund in the preparation of the financial statements.
SECURITY VALUATION: Portfolio securities that are listed on a securities
exchange (whether domestic or foreign) or The Nasdaq Stock Market ("NSM") are
valued at the last sale price as of 4:00 p.m., Eastern Time, or, in the absence
of recorded sales, at the average of readily available closing bid and asked
prices on such exchange or NSM. Unlisted securities that are not included in NSM
are valued at the average of the quoted bid and asked price in the
over-the-counter market. Fixed-income securities are normally valued on the
basis of quotes obtained from brokers and dealers or pricing services. Certain
fixed-income securities for which daily market quotations are not readily
available may be valued pursuant to guidelines established by the Board of
Trustees, with reference to fixed-income securities whose prices are more
readily obtainable or an appropriate matrix utilizing similar factors. As a
broader market does not exist, the proceeds received upon the disposal of such
securities may differ from quoted values previously furnished by such market
makers. Securities for which market quotations are not otherwise available are
valued at fair value as determined in good faith by Mercury Advisors (the
"Adviser"), formerly Hotchkis and Wiley, under procedures established by the
Board of Trustees. Short-term investments which mature in less than 60 days are
valued at amortized cost (unless the Board of Trustees determines that this
method does not represent fair value), if their original maturity was 60 days or
less, or by amortizing the values as of the 61st day prior to maturity, if their
original term to maturity exceeded 60 days. Investments quoted in foreign
currency are valued daily in U.S. dollars on the basis of the foreign currency
exchange rate prevailing at the time of valuation.
FOREIGN CURRENCY TRANSLATIONS: The books and records of the Fund are maintained
in U.S. dollars. For the Fund, foreign currency transactions are translated into
U.S. dollars on the following basis: (i) market value of investment securities,
assets and liabilities at the daily rates of exchange, and (ii) purchases and
sales of investment securities, dividend and interest income and certain
expenses at the rates of exchange prevailing on
13
<PAGE> 15
the respective dates of such transactions. The Fund does not isolate and treat
as ordinary income that portion of the results of operations arising as a result
of changes in the exchange rate from the fluctuations arising from changes in
the market prices of securities held during the period. However, for federal
income tax purposes, the Fund does isolate and treat as ordinary income the
effect of changes in foreign exchange rates arising from actual foreign currency
transactions and the effect of changes in foreign exchange rates arising from
trade date and settlement date differences.
FEDERAL INCOME TAXES: It is the Fund's policy to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and the Fund
intends to distribute substantially all of its investment company net taxable
income and net capital gains to shareholders. Therefore, no federal income tax
provision is required.
INCOME AND EXPENSE ALLOCATION: Common expenses incurred by the Trust are
allocated among the Funds based upon (i) relative average net assets, (ii) as
incurred on a specific identification basis, or (iii) evenly among the Funds,
depending on the nature of the expenditure. Net investment income, other than
class specific expenses, and realized and unrealized gains and losses are
allocated daily to each class of shares based upon the relative net asset value
of outstanding shares of each class of shares at the beginning of the day (after
adjusting for the current day's capital share activity of the respective class).
RESTRICTED SECURITIES: The Fund owns investment securities which are
unregistered and thus restricted as to resale. Resales of such securities may
require registration or be limited to qualified institutional buyers. At June
30, 2000, the Fund had restricted securities with an aggregate market value of
$95,797,078, representing 27% of the net assets of the Fund. Of this amount, the
Fund had restricted securities that were determined to the illiquid pursuant to
guidelines adopted by the Board of Trustees with an aggregate market value of
$2,051,629, representing 1% of the net assets of the Fund.
WHEN-ISSUED SECURITIES: The Fund may purchase securities on a when-issued or
delayed delivery basis. Although the payment and interest terms of these
securities are established at the time the purchaser enters into the agreement,
these securities may be delivered and paid for at a future date, generally
within 45 days. The Fund records purchases of when-issued securities and
reflects the values of such securities in determining net asset value in the
same manner as other portfolio securities. The Fund maintains at all times cash
or other liquid assets in an amount at least equal to the amount of outstanding
commitments for when-issued securities.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
DISTRIBUTIONS TO SHAREHOLDERS: Dividends from net investment income are declared
and paid monthly. Distributions of net realized capital gains, if any, will be
declared and paid at least annually. The Fund may utilize earnings and profits
distributed to shareholders on redemption of shares as part of the dividends
paid deduction.
OTHER: Security and shareholder transactions are recorded on trade date.
Realized gains and losses on sales of investments are calculated on the
identified cost basis. Dividend income and dividends and distributions to
shareholders are recorded on the ex-dividend date. Interest income is recognized
on the accrual basis. Generally accepted accounting principles require that
permanent financial reporting and tax differences relating to shareholder
distributions be reclassified within the capital accounts.
14
<PAGE> 16
NOTE 2.
INVESTMENT ADVISORY AGREEMENT. The Fund has an investment advisory agreement
with the Adviser with which certain officers and Trustees of the Trust are
affiliated. The Adviser is an indirect wholly-owned subsidiary of Merrill Lynch
& Co., Inc. The Adviser receives a fee, computed daily and payable monthly, at
the annual rate of 0.46% as applied to the Fund's daily net assets. The Adviser
has contractually agreed to pay all operating expenses in excess of 0.58% for
the Investor Class and 0.83% for the Distributor Class as applied to each
class's daily net assets through June 30, 2001. For the year ended June 30,
2000, the Adviser paid $524,134 of operating expenses on behalf of the Fund.
The Trust has adopted a plan pursuant to Rule 12b-1 under the Investment Company
Act of 1940 (the "12b-1 Plan") that allows the Distributor Class of the Fund to
make payments to administrators, broker/dealers or other institutions that
provide accounting, recordkeeping or other services to investors and that have
an administrative services agreement with the Trust or the Adviser to make
Distributor Class shares available to their clients ("Recipients"). Recipients
are paid an annual rate of 0.25% of the average net assets of the Distributor
Class shares invested through the Recipient as compensation for providing
distribution-related services such as advertising, printing and mailing
prospectuses to potential investors and training sales personnel regarding the
Fund. During the year ended June 30, 2000, the Distributor Class of the Fund
incurred expenses of $19,883 pursuant to the 12b-1 Plan.
Certain authorized agents of the Fund charge a fee for accounting and
shareholder services that they provide to the Fund on behalf of certain
shareholders; the portion of this fee paid by the Fund is included within
Accounting and transfer agent fees and expenses in the Statement of Operations.
As permitted under Rule 10f-3 of the Investment Company Act of 1940, the Board
of Trustees of the Trust has adopted procedures which allow the Fund, under
certain conditions described in the Rule, to acquire newly-issued securities
from a member of an underwriting group in which an affiliated underwriter
participates.
NOTE 3.
CREDIT FACILITY. Effective December 3, 1999, the Trust entered into a one year
Credit Agreement with a syndicate of bank lenders led by Bank of America
intended to provide the Fund with a source of cash to be used to meet redemption
requests from Fund shareholders. The Trust together with certain other open-end
investment companies advised by Merrill Lynch Investment Managers, L.P. and/or
its affiliates may borrow in the aggregate up to $1,000,000,000, except that in
no event may the borrowing by the Fund or any participating fund be in excess of
that permitted by its prospectus and Statement of Additional Information or by
applicable law. The Fund had no borrowings under the Credit Agreement for the
year ended June 30, 2000.
15
<PAGE> 17
NOTE 4.
SECURITIES TRANSACTIONS. Purchases and sales of investment securities, other
than short-term investments, for the year ended June 30, 2000, were as follows:
<TABLE>
<CAPTION>
Purchases Sales
------------------------------ ------------------------------
Fund U.S. Government Other U.S. Government Other
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Low Duration Fund.............................. $310,060,918 $337,412,071 $348,230,528 $330,265,563
</TABLE>
As of June 30, 2000, unrealized appreciation (depreciation) for federal income
tax purposes was as follows:
<TABLE>
<CAPTION>
Net
Appreciation Appreciated Depreciated
Fund (Depreciation) Securities Securities
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Low Duration Fund........................................... $(5,841,745) $1,759,225 $(7,600,970)
</TABLE>
At June 30, 2000, the cost of investments for federal income tax purposes was
$405,784,629. Any differences between book and tax are due primarily to wash
sale losses. At June 30, 2000, the Fund deferred, on a tax basis, post-October
losses of $5,886,780. Such amounts may be used to offset future capital gains.
The Fund utilized $1,293,682 of post-October losses from the prior year to
offset current year net capital gains. At June 30, 2000, the Fund had
accumulated net realized capital loss carryovers of $723,707 expiring in 2007
and $3,033,738 expiring in 2008.
NOTE 5.
SUBSEQUENT EVENTS. The Board of Trustees has approved, effective on or about
October 5, 2000, (i) a change in the name of the Fund to Mercury Low Duration
Fund, (ii) the establishment of a multi-class load distribution structure and
(iii) the transfer of the Fund's assets to a "master" fund in a master/feeder
structure (subject to shareholder approval).
NOTE 6.
FEDERAL TAX DISCLOSURE (UNAUDITED). For the year ended June 30, 2000, 13% of
dividends distributed were derived from interest on U.S. government securities
which is generally exempt from state income tax. For the year ended June 30,
2000, 1% of ordinary distributions paid qualifies for the dividend received
deduction available to corporate shareholders.
16
<PAGE> 18
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Distributor Class
Investor Class -------------------
Year Ended June 30, September 24, 1999*
----------------------------------------------------------- through
LOW DURATION FUND 2000 1999 1998 1997 1996 June 30, 2000
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year.... $ 9.91 $ 10.20 $ 10.23 $ 10.12 $ 10.15 $ 9.95
INCOME FROM INVESTMENT OPERATIONS:
Net investment income............. 0.65 0.60 0.66 0.66 0.68 0.51
Net realized and unrealized gain
(loss) on investments........... (0.13) (0.28) 0.05 0.10 0.06 (0.14)
------- ------- ------- ------- ------- ------
Total from investment
operations...................... 0.52 0.32 0.71 0.76 0.74 0.37
------- ------- ------- ------- ------- ------
LESS DISTRIBUTIONS:
Dividends (from net investment
income)......................... (0.65) (0.59) (0.68) (0.64) (0.72) (0.53)
Distributions (from realized
gains).......................... -- (0.02) (0.06) (0.01) (0.05) --
------- ------- ------- ------- ------- ------
Total distributions............... (0.65) (0.61) (0.74) (0.65) (0.77) (0.53)
------- ------- ------- ------- ------- ------
Net Asset Value, End of Year.......... $ 9.78 $ 9.91 $ 10.20 $ 10.23 $ 10.12 $ 9.79
======= ======= ======= ======= ======= ======
TOTAL RETURN.......................... 5.40% 3.15% 7.19% 7.79% 7.47% 3.83%++
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (millions).... $344.73 $409.99 $253.15 $171.21 $189.16 $16.01
Ratio of expenses to average net
assets:
Before expense reimbursement...... 0.72% 0.64% 0.65% 0.66% 0.60% 0.98%+
After expense reimbursement....... 0.58% 0.58% 0.58% 0.58% 0.58% 0.83%+
Ratio of net investment income to
average net assets:
Before expense reimbursement...... 6.29% 5.65% 6.39% 6.26% 7.07% 6.33%+
After expense reimbursement....... 6.43% 5.71% 6.46% 6.34% 7.09% 6.48%+
Portfolio turnover rate............... 182% 201% 119% 202% 50% 182%
</TABLE>
* Commencement of operations.
+ Annualized.
++ Not Annualized.
See Notes to the Financial Statements
17
<PAGE> 19
HOTCHKIS
AND WILEY FUNDS
--------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees of Hotchkis and Wiley Funds and Shareholders of the
Hotchkis and Wiley Low Duration Fund:
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of the Hotchkis and Wiley Low Duration
Fund (one of the ten portfolios of Hotchkis and Wiley Funds, the "Fund") at June
30, 2000, the results of its operations for the year then ended and the changes
in its net assets and the financial highlights for each of the periods
indicated, in conformity with accounting principles generally accepted in the
United States. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Fund's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at June 30, 2000 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Milwaukee, WI
August 17, 2000
18
